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The recent large decline in gold has gotten a lot of attention, as you might expect. Over the last ten years or so gold has taken on a much more mainstream awareness on the part of investors due in part to the many investment products created to invest in gold and increased apprehension over the direction that the country is going in - deteriorating fundamentals, slower growth and unprecedented Central Bank intervention.

We have maintained exposure to gold for many years, first through a mining stock and then with the SPDR Gold Trust (NYSEARCA:GLD) when it hit the market, for what amounts to insurance reasons. Although not perfect (nothing is), gold has a tendency to go up in the face of external shocks. Gold also tends to have a low and sometimes negative correlation to US equities.

Over the years I have been consistent in believing that low to mid single digit exposure is enough to have the effect of being a diversifier. When gold was skyrocketing there were comments left that 3, 4 or 5% is nowhere near enough and when gold goes down a lot comments were left that there is no reason to ever own gold.

Another comment I've made repeatedly about gold is that if gold is the best performer you've got in your portfolio then chances are things aren't going very well. If equities are going up and your diversifier-sized position in gold is going down that is ok. If everything you own goes up together then you should expect it to go down together and in that case you really aren't very well diversified.

(click to enlarge)

If you look at the chart above comparing client holding GLD and SPY I think you see that gold does what it is supposed to more often than not. For much of the last decade stocks were not making much progress and gold went quite a bit higher. In late 2007 and into the first few months of 2008 there was a negative correlation. Starting in March 2009 everything went up for a while. Then in this down move for gold equities have gone straight up, so again a negative correlation, which is what people expect during moments of clarity.

Stocks up, gold down is not a terrible outcome for the investor using gold as a diversifier. Of course, it is up to each individual to decide whether after accounting for all the pluses and minuses of a position in gold it is still worth owning, but stocks up gold down is not a shocking market behavior.